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Do non-compete clauses stifle entrepreneurship and innovation?

The UK government wants to make Britain the best place in Europe to innovate and start up a new business and, in order to encourage this, “want[s] to look at our employment rules and whether they could be stifling British entrepreneurship by preventing workers from starting up their own business after leaving a job.”

In order to do so, the Department for Business, Innovation and Skills (BIS) has published a Call for Evidence asking for information on what is meant by non-compete clauses, when and how they are used, their prevalence, what the benefits and disadvantages are, whether there is transparency or misperceptions, and evidence of the effect they are having on start-ups, employers and workers.

Most jurisdictions permit post-termination employment restrictions in one way or another, although the details may differ. However, in California, non-compete clauses are unlawful. Massachusetts is considering a similar ban. US research suggests the limited use and enforcement of such clauses has had a positive impact, as non-compete clauses reduce the pool of labour from which competitors can hire, restrict workers setting up their own business, and the call for evidence says that there is evidence to suggest that the enforcement of non-compete clauses can reduce investment in research and development.

On the other hand, others say that non-compete clauses are an essential practice that encourage employers to develop new technologies and invest in working training.

While the Call for Evidence says that the UK labour market is thriving and “one of the main drivers of this success is the high degree of flexibility enjoyed by both employers and workers in the UK”, there needs to be a balance, suggests BIS, between an employer protecting its business interests when staff move on, and making sure the worker is not unfairly disadvantaged.

The current UK position of non-compete clauses

Although the Call for Evidence uses the term “non-compete clauses”, they are using the phrase to refer more widely to post-termination employment restrictions (also known as restrictive covenants), which may be drafted to prevent

former employees working for a competing business (including their own start-up) for a period of time

Former workers having dealings with the previous employer’s customers or contacts

Former workers hiring colleagues from their old job

Former workers setting up a business in a geographical location that would disadvantage their old employer

Such clauses are governed by the common law principle of restraint of trade, and are unenforceable unless they are designed to protect legitimate business interests and go no further than is reasonably necessary. Each case will be considered by a court on its facts but legitimate business interests may include trade connections (with customers, clients, or suppliers), goodwill, protecting trade secrets and confidential information, and protecting the stability of the workforce.

The Call for Evidence notes that “There is no set formula of whether a non-compete clause is valid and as such there is no ‘tick list’ for an employer to follow to ensure such clauses are successful” – is this a hint as to what the government might have in mind?

Questions and areas for consideration

The government is asking:

For examples of non-compete clauses – are any of the types mentioned above being incorrectly categorised as non-competes? Are there any other types of clauses which restrict a worker’s ability to complete?

How prevalent are non-compete clauses across the UK – are they particularly used in certain sectors, or for certain roles, or more widely?

Have you as an employer used a non-compete clause? If so, why? What was the type of job, and what was the restriction? Have you ever had to challenge a former employee about a possible breach?

Have you as a worker been subject to a non-compete clause? If so, what was the type of job, and what was the restriction? Were you aware of the clause and what it meant when you signed your contract? Have you ever disregarded a non-compete clause – what happened next?

Have you experience of such a clause affecting or preventing workers moving job or an employer’s decision to hire, or starting up a new business?

Would legislation to restrict non-compete clauses in certain situations affect your business, or lead to unintended consequences? What types of businesses might benefit from additional restrictions? Do you think existing intellectual property and confidentiality law is sufficient to protect employers’ business interests?

In your experience (whether as employer, individual, or adviser), are non-compete clauses transparent? Are you aware of any guidance, and could it be improved?

Compare jurisdictions: Employment & Labor: North America

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